A 13-year record in 2020 that led the Nigerian Stock Exchange (NSE) emerging the world’s best performer with 50 percent gain, the most since December 2007, has failed to curb the Lagos Bourse from becoming one of Africa’s worst performers year-to-date (YTD).
Out of the 17 stock markets analysed across Africa, NSE only outperformed two – Botswana and Egypt – to rank 15th with a YTD return of -3.73 percent.
Zimbabwe reported the highest YTD return of +68.98 percent, followed by South Africa and Ghana with a return of +14.57 percent and +14.02 percent, respectively, 10 times more than Nigeria’s return.
Increased investors’ appetite for returns available in the fixed-income market coupled with the limited rewards from the concluding positive 2020 reports forced investors to redistribute their asset to the less risky short-term government instrument, analysts said.
“The bearish sentiment in the equities market has been driven by yields in the fixed income market reverting higher,” Ayorinde Akinloye, investment research analyst at United Capital, said.
As a result, Akinloye said, “Investors have been reducing positions to rotate to fixed income assets.”
After opening the first trading week of 2021 with a market capitalisation of N20.98 trillion, the NSE All-Share Index shed N610 billion to settle at N20.37 trillion in the first week of April.
According to Gbolahan Ologunro, senior research analyst at Cordors Securities, it is expected that, given the impact of the shocks faced by African economies in 2020, this year should be a year of recovery, which bolts well for corporate earnings.
“I think that explains the broadly positive performance across major economies in Africa, but the divergence of Nigerian equities from the trend is largely due to the reversal in yields in the fixed income market, which was instrumental in the Bourse gain of 50 percent in 2020,” Ologunro noted.
Weeks after the Central Bank of Nigeria (CBN) shocked the market with a 10.10 percent stop rate for the 362-day OMO bill, the highest level seen in almost a year, fixed-income investors demanded higher rates for T-bills.
After hitting a four year-low of near-zero percent in 2020, yields on the Federal Government risk-free treasury bills climbed to more than 15-month high in the three months ended March 2021.
“The increase in the stop rates can be linked to the hike in CBN OMO rates some weeks ago. Investors are bidding at higher rates and the DMO also needs to raise the cut off rate to fill some of the orders,” Ayodeji Ebo, head, Retail Investment, Chapel Hill Denham, said.
To take advantage of the recent uptick in T-bills, Ologunro said domestic investors had been forced to rebalance their portfolio towards fixed income instruments, and as a result, equities have been underweight and had resulted in the bearish performance seen in the equities market in the last two months.
The negative 3.73 percent YTD return on equities means that the real return on investment is at over -20 percent. Nigeria’s February inflation rate quickened to a 48-month high at 17.33 percent.
The 8 percent yield on the longer 364-day Treasury bill with a real return of -9.33 percent is much better than what can be obtained from the equities market.
An investor who invested N1 million in Nigeria’s equities market in January 2021 would have lost N37,300 as of Tuesday, April 6, 2021, and is left with a capital of N962,700.
With the earnings season gradually coming to a halt, Ologunro said investors would be looking at development in the macro space as well as corporate actions as possible catalysts to drive renewed interest for stocks.
On macro-economic development, he said, one crucial factor would be an improvement in liquidity in the FX market, particularly in the I&E window, noting, “I think that will improve participation from foreign portfolio investors who have been net sellers of Nigerian equities over the last three years.”
According to the Lagos-based analyst, investors would also be looking at corporate actions across different sectors and companies in those spaces.
In the banking space, for instance, he said many Nigerian banks communicated their intention to operate a holding structure last year.
“So, investors will be looking forward to positive development in that space. In the telco space, you would want to look at the potential that CBN would grant MTN mobile money licence to operate a payment service bank.”
Recapitalisation of the Nigerian insurance industry was another possible driver cited by Ologunro.
Meanwhile, Nigeria’s equities market closed red on Tuesday, down by 0.42 percent as investors traded shares from across the board. The NSE All-Share Index dropped by 164.07 basis points to 38,766.61, after opening at 38,917.02.
